Can an SME protect itself against a potential Grexit?

 

The likelihood of Grexit – Greece being forced out of the Eurozone following a sovereign default – has receded following last month’s agreement over a third bailout package.

Yet most major economists believe the risk of a disorderly Greek withdrawal from the single currency remains a distinct possibility if substantial debt relief is not offered to the country. UK companies have a more limited exposure to a Greek default and exit than their continental competitors.

Last year, British exports to Greece amounted to about £920 million a year, a fraction of, say, Germany’s which were worth almost £5 billion.But should Greece withdraw from or be ejected from the euro, the effect on British business – small and medium sized enterprises (SMEs) in particular – would still be significant.

The euro is already weak against Sterling and Grexit would likely see a sharp decline or collapse in the value of the single currency.

Should that happen, the cost of exporting to the Eurozone would rise further, creating even more difficult conditions for SMEs that trade with Britain’s biggest market. Furthermore, there would likely be a collapse in business confidence on the continent which the UK would find it hard to escape. Consumer demand would inevitably be hit in Britain and beyond, hurting companies who trade domestically or export to the rest of the world beyond Europe.

For SMEs trading directly with Greece, one of the biggest concerns would be what would happen to money they are owed by Greek firms in the event of that country reverting to the drachma. It’s likely that many of those would not be paid, leaving companies out of stock as well as pocket.  

How can an SME limit the potential damage?

SMEs trading in the Greek market can limit their exposure to the possibility of Grexit and the turmoil in the foreign exchange (FX) markets that would likely provoke by adopting one or more of a number of foreign exchange tactics:  

Option hedging

If there is a delay between quoting for goods or services and the foreign client agreeing the quote, option hedging offers reasonable protection. A firm is able, but not compelled, to pay for an agreed amount of FX from a trader in exchange for the other currency at a set rate on or before the date that the option expires.

If the value of the euro, for instance, falls against Sterling, the company would allow the option to expire, selling the currency for more than it expected.  

Forward contracts

Using forward contracts is a form of hedging where an SME can protect itself against sudden FX movements. It is done by agreeing a rate with a supplier or customer before the sale or purchase with delivery up to 12 months afterwards. The two companies might, for example, agree 90-day terms at set euro rate.  

Cash in advance

Firms can ask their clients in the Eurozone to pay for goods and services in cash in advance. Likewise, importers should consider paying in advance, either part payment or in full.

Cash in advance payments are an alternative to using hedges, allowing a firm to set the price for a sale or a purchase and reducing the risk of losses caused by a sudden fluctuation in one of the currencies traded.